Austin lost its triple-A rating from Fitch Ratings en route to the market with $328 million of bonds.
The downgrade to AA-plus “reflects continued employee pension challenges and weakened expenditure flexibility,” Fitch analyst Steve Murray said.
The downgrade affects about $1.5 billion of outstanding public improvement bonds, certificates of obligation and public property finance contractual obligations. Another $3.3 million of Mueller Local Government Corporation contract revenue bonds, series 2006, were downgraded to AA from AA-plus.
S&P Global Ratings affirmed its AAA rating on the bonds scheduled to price competitively on Sept. 14.
The debt coming to market is a mix of refunding and new money bonds and certificates. The deal includes about $160 million of tax-exempt improvement and refunding bonds and $82 million of taxable bonds. Also in the mix are about $38 million of certificates of obligation, $28 million of property finance contractual obligations, and $20 million of taxable certificates of obligation.
The public improvement bonds, COs, and PPFCOs are direct obligations of the city backed by property taxes. The COs also feature a limited pledge of surplus revenues of the city's solid waste disposal system.
"The 'AAA' long-term rating reflects the strength of Austin's broad and diverse local economy, which despite some disruptions associated with the COVID-19 pandemic, continues to demonstrate resilience fueled by population and job growth," said S&P Global Ratings credit analyst Andy Hobbs.
“Generally increasing revenue streams, supported by a very strong framework of financial management and ability to make midyear course corrections, have allowed the city to maintain ample financial flexibility. In the near term, we expect the city's financial position will remain very strong, supporting the stable outlook,” he added.
The Texas legislature in its 2021 session approved and the governor signed into law a reform package for the city's police pension plan that deals with the plan's major structural weaknesses and low funding levels, according to Fitch.
“However, the city has not addressed the underfunded municipal employee pension plan with a reform proposal, although management reports plans to submit reform legislation at the 2023 legislative session,” analysts noted in Wednesday's action. “In addition, annual contributions to both the police and municipal plans still fall short of actuarial requirements.”
Fitch also sees erosion in spending flexibility from a recently approved charter amendment that requires binding arbitration between the city and firefighters in the event of a future contract negotiation impasse.
“Fitch believes longer-term workforce controls are materially weaker under a binding arbitration framework,” Murray wrote.
"We are very much aware of rating agencies’ concerns about pension liabilities," said Austin Treasurer Belinda Weaver. "That’s why we have worked diligently over the past year to improve the long-term sustainability of the Police and Employees Retirement Systems. It is important to note that even with this downgrade, the City of Austin’s credit remains among the highest of all major Texas cities. Austin’s booming and diverse economy, a healthy overall financial position, and prudent financial management practices continue to make the City’s bonds a highly attractive investment."
Moody's Investors Service downgraded Austin to Aa1 from Aaa in October 2020, citing "the high leverage and fixed costs attributable to the city's pension and other post employee benefit plans that have increased to levels that are inconsistent with Moody's highest rating category."
Although the COVID-19 pandemic did not factor into the ratings for the upcoming issue, Austin has been hard hit by the fourth wave of the coronavirus.
COVID-19 patients in intensive care units exceeded the Austin area's capacity as the Delta variant spread.
Health care providers are stretching their resources “to the max” to meet the demand, said the city's medical director, Dr. Desmar Walkes.
“This delta variant is moving like wildfire through our city,” she said last week. “We really want our community to understand that we need your help. We need you to wear a mask. We need you to go and get vaccinated.”
About 67% of people 12 and older are fully vaccinated in Travis County, according to
Health officials reported 229 people in intensive care units in the five-county region, which had a 200-bed capacity.
“The situation is still dire,” Walkes said.
Austin city and school officials sought to require masks but were thwarted by Gov. Greg Abbott’s edict forbidding mask requirements. Abbott, who contracted the virus after a maskless political rally in Collin County, has taken the fight to the state Supreme Court, backed up by Republican attorney general Ken Paxton.
While Abbott and other Republicans seek to stymie efforts in Democratic-leaning Austin and other major Texas cities to ease access to voting, the capital city and the state still cooperate on some major infrastructure projects.
An $895 million state bond-funded project to convert four blocks of Congress Avenue north of the state Capitol into a mall has passed the halfway mark this summer.
In the 2021 session, the Texas Legislature approved $313.7 million for phase two. The project will add 1.5 million square feet of space in four new state buildings, below-ground parking and a pedestrian promenade for public events.
State officials aim to bring some of the thousands of state employees who work in rented offices throughout Austin into state-owned buildings in the Capitol complex.
The plan is also expected to save about $25 million per year on leases.
Another state project that will have an even larger impact is the $7.5 billion plan to redevelop the highly congested section of Interstate 35 that bisects the city. The Texas Transportation Commission last year earmarked $3.4 billion for the project.
The Texas Department of Transportation’s current design proposal would remove the upper-decks of I-35 and the lanes would be lowered below grade through downtown. Two managed lanes in each direction would be added, and TxDOT sees those as non-tolled for options like carpooling or mass transit.
Austin officials are asking TxDOT to make the new lanes tolled, like TX Loop 1, also known as MoPac Expressway, to keep traffic moving.
As that massive project is taking place, Austin and other agencies will be working on Project Connect, a $7.1 billion mass transit plan Austin voters approved last year.
The Austin Transit Partnership, the organization in charge of Project Connect, this month outlined a $312.2 million budget for the year that will largely focus on designs for the Orange and Blue lines.
One of the agencies in the transit coalition, the Capital Metropolitan Transportation Authority Board of Directors, anticipates capital projects are expected to cost $806 million, with the primary cost factor being Project Connect at just under $300 million.
Cap Metro Deputy CFO Kevin Conlan told the board that the Orange Line is projected to cost $26.2 million and the Blue Line $24.6 million.
Austin has one of the strongest metro area economies, and Fitch expects that trend to continue as the pandemic recovery develops.
“The large state government and higher education employment base historically has provided a stabilizing presence and economic buffer during downturns,” Murray said. “Population has been growing at a pace well above the state and nation and is approaching one million per the 2020 U.S. Census.”
Update: The story was updated with a comment from Austin's city treasurer.
